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Heed the lessons of Icarus and Nortel, investors urged

By David PaddonThe Canadian Press

Mon., July 27, 2015

It was 15 years ago this month when Nortel Networks’ shares hit an all-time high of $124.50 on Toronto’s stock market.

The company’s sky-high stock made it by far Canada’s most valuable company at the time — with a market value that briefly surpassed any of the banks and resource companies listed on the Toronto Stock Exchange.

Shortly after hitting a peak of $124.50 in July 2000, Nortel shares began a bumpy slide that resulted in a worthless stock and the bankruptcy breakup of what was once a global leader in telecommunications networks.
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It didn’t last. A few months later, Nortel shares began a bumpy slide that resulted in a worthless stock and the bankruptcy breakup of what was once a global leader in telecommunications networks.

Even though Nortel is now long dead, industry veterans say that, human nature being what it is, most investors won’t learn from its boom and bust.

“People are mesmerized by rising stock prices. They don’t ask if this is coming to a limit. The longer it goes on, the more that they are convinced that it’s going to keep on going on.”

He predicts that today’s high-flying social media stocks will be crushed — just as other tech stocks were in the past — because investors are willing to overpay if they expect a company’s spectacular growth will continue into “the infinite future.”

Thomas Caldwell, who has had a long involvement with the Toronto Stock Exchange as the founder of Caldwell Securities, says he thinks the next crisis will come from “the ETF world” — exchange-traded funds that mimic market indexes like the S&P 500.

“You may have some heavy weightings in some big companies that just aren’t going to be there some years from now,” Caldwell says.

Nortel’s large weighting on the Toronto market’s benchmark index — as much as 37 per cent of the entire TSE 300 index — was unusual and problematic, but not the focus of reforms going on behind the scenes during the same time period.

“Changing the TSE 300 to what became the S&P/TSX composite was a fairly long, drawn-out effort and a lot of discussion,” says David Blitzer, who is managing director of S&P Dow Jones Indices.

“Clearly Nortel was on everybody’s mind when it was going up ... but in my recollection they were two separate issues.”

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The S&P/TSX composite index, which is most often quoted in media reports on the Toronto Stock Exchange, had 248 stocks as of Thursday.

Valeant Pharmaceuticals and the Royal Bank of Canada each had a weighting of 6.1 per cent, followed by TD Bank at 5.4 per cent.

Blitzer says it’s not likely that another company could once again dominate Canada’s main stock market index the way Nortel did 15 years ago, but it’s also not impossible.

“It’s a question of, ‘Are we going to find a company that grows that fast or makes that many acquisitions?’ ”

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